Johnson & Johnson (JNJ) Analysis Highlights:

• Recent Price: Price stock recently traded at time of publishing
• Recent Price Range: Price range in past 52 weeks
• Price Target: Estimated Fair Value for shares
• Estimated Gain / Loss: Difference between Recent Price & Price Target
• Shareholder Ownership: Repurchasing or dilution of outstanding shares
• Dividend Safety Score: Risk of reducing or eliminating dividend
• Buy / Sell Score: Indicates if we are buying or selling shares

Understanding the Business

Johnson & Johnson (JNJ) is a well-known company with a 130-year history and a 61-year consecutive dividend increase, making it one of the longest and most impressive dividend growth stocks. Established in 1887 in New Jersey, the company operates in nearly all countries and has a primary focus on human health and well-being products. Furthermore, the company remains poised for substantial future growth due to its robust pipeline and recent acquisitions.

In August 2023, Johnson and Johnson separated its Consumer Health business (Kenvue). As a result, Johnson and Johnson now consists of two business segments: Innovative Medicine and MedTech.

Innovative Medicine

Innovative Medicine: This segment offers a wide range of treatments for various diseases, including immunology, infectious diseases, neuroscience, oncology, cardiovascular and metabolic diseases, and pulmonary hypertension. These medicines were developed in collaboration with strategic partners and are distributed directly to retailers, wholesalers, distributors, hospitals, and healthcare professionals for prescription use.

MedTech

MedTech: This segment offers a variety of products in Interventional Solutions, Orthopaedics, Surgery, and Vision categories. Interventional Solutions include electrophysiology products for heart rhythm disorders, heart recovery technologies for severe coronary artery disease, and neurovascular care for stroke. Moreover, Orthopaedics includes products for hips, knees, trauma, and spine, while Surgery includes advanced technologies and solutions for breast aesthetics and ear, nose, and throat procedures. Johnson & Johnson Vision products include ACUVUE Brand contact lenses and TECNIS intraocular lenses for cataract surgery.

Business Operations

In 2023, global sales increased by 6.5% to $85.2 billion, compared to a 1.6% increase in 2022.

Johnson & Johnson has 61 manufacturing facilities, covering 9.8 million square feet of floor space, which are operated by its subsidiaries. Within the United States, 5 facilities are used by the Innovative Medicine segment and 18 by the MedTech segment. Outside of the United States, 13 facilities are used by the Innovative Medicine segment and 25 by the MedTech segment.

Johnson & Johnson increased its dividend for the 61st consecutive year in 2023, with cash dividends of $4.70 per share in 2023 and $4.45 per share in 2022.

Innovative Medicine Operations

In 2023, the Innovative Medicine segment’s sales increased by 4.2% from 2022, with U.S. sales reaching $31.2 billion and international sales at $23.6 billion. However, acquisitions and divestitures had a net negative impact of 0.1% on the segment’s operational sales growth.

Immunology

Immunology products sales increased by 6.6%, with STELARA (ustekinumab) and TREMFYA (guselkumab) growth. However, REMICADE (infliximab) sales decreased due to biosimilar competition.

Infectious Disease

Infectious disease products sales decreased by 18.9% due to a decline in COVID-19 vaccine revenue and loss of exclusivity of PREZISTA. EDURANT was the only growth in the segment.

Neuroscience

Neuroscience product sales reached $7.1 billion in 2023, a 3.6% increase from the previous year. The growth of SPRAVATO was fueled by ongoing launches, increased physician confidence, and patient demand. However, declines in RISPERDAL/RISPERDAL CONSTA and paliperidone injectables outside the U.S. were partially offset.

Oncology

Oncology products sales reached $17.7 billion, a 10.5% increase from the previous year. DARZALEX sales were driven by market growth and share gains, while ERLEADA sales were driven by market growth in Metastatic Castration Resistant Prostate Cancer. CARVYKTI sales were driven by ongoing launches, market share gains, and capacity improvement. Sales of TECVAYLI and TALVEY contributed to growth, but ZYTIGA and IMBRUVICA were partially offset by loss of exclusivity and global competitive pressures.

Pulmonary Hypertension

Pulmonary hypertension products sales increased by 11.6%, with UPTRAVI (selexipag) and OPSUMIT (macitentan) contributing to growth.

Cardiovascular / Metabolism / Other

Cardiovascular/Metabolism/Other products sales decreased 5.5% YoY to $3.7 billion, primarily due to unfavorable patient mix and access changes, affecting XARELTO (rivaroxaban) sales.

MedTech Operations

In 2023, the MedTech segment’s sales increased by 10.8% from 2022, with U.S. sales reaching $15.3 billion and international sales reaching $15.1 billion. This growth was primarily due to the Abiomed acquisition, which contributed to a net positive 4.6% in operational sales growth.

Surgery

In 2023, Surgery franchise sales reached $10.0 billion, a 3.6% increase from 2022. Advanced Surgery growth was primarily driven by Biosurgery global procedure growth and portfolio strength, while General Surgery growth was primarily driven by increased procedures, technology penetration, and Wound Closure portfolio benefits.

Orthopaedics

Orthopaedics franchise sales increased by 4.1% in 2023 to $8.9 billion, driven by global procedure growth, continued strength, and recent product additions. Growth in hips was primarily driven by procedures and ATTUNE portfolio, while knees growth was primarily driven by procedures and VELYS Robotic assisted solution. Trauma growth was driven by global procedures and new products, while Spine, Sports & Other growth was primarily driven by Digital Solutions and Craniomaxillofacial products.

Interventional Solutions

Interventional Solutions sales reached $6.3 billion, a 47.7% increase from 2022, including sales from Abiomed.

Electrophysiology

Electrophysiology sales grew by double digits due to global procedure growth and new product performance.

Vision

Vision sales reached $5 billion, a 4.6% increase from 2022. The Vision franchise saw growth in Contact Lenses/Other, surgical operational growth, and cataract procedure growth.

Business Strategies

Johnson and Johnson recognizes the importance of its employees in its long-term strategy and aims to maintain a corporate culture valuing diversity, equity, inclusion, innovation, health, well-being, and safety. Management is responsible for ensuring policies and processes align with this vision. The company’s human capital management strategy focuses on attracting, developing, and retaining talent, while also empowering and inspiring them. This approach encourages employees to succeed professionally and personally while achieving the company’s business goals.

Johnson and Johnson collaborates with other pharmaceutical or biotechnology companies to develop and commercialize drug candidates or intellectual property. These collaborations involve active participants, with significant risks and rewards dependent on the commercial success of the activities. Activities include research, development, marketing, selling, and distribution. Upfront, milestone, and royalty payments are often required, contingent on future events linked to the asset’s development success.

Johnson and Johnson avoids trading or speculative financial instruments and contracts with major financial institutions with investment grade credit ratings.

Management’s Perspective

Johnson and Johnson is a global healthcare company focused on innovative medicine and medical technology to prevent, treat, and cure complex diseases. In 2023, the company invested $15.1 billion in research and development, with new products accounting for 25% of sales. Its diverse workforce of 131,900 employees empowers the company to lead purposefully and innovate, resulting in its success.

Product Pricing

Johnson and Johnson has a long-standing policy of pricing products responsibly due to the rising cost of healthcare. For the period 2013-2023, the weighted average compound annual growth rate of the company’s net price increases for healthcare products was below the U.S. Consumer Price Index (CPI). The company operates in countries with significant economic challenges, such as Argentina, Venezuela, and Turkey, where inflation rates have impacted global economies. The company maintains profit margins through cost reduction programs, productivity improvements, and periodic price increases.

Argentina Government Actions

In December 2023, the Argentine government devalued the peso by approximately 50%, leading to a charge of approximately $130 million related to operations in Argentina. However, as of December 31, 2023, Johnson and Johnson’s Argentine subsidiaries represented less than 1.0% of its consolidated assets, liabilities, revenues, and profits from continuing operations.

Janssen Pharmaceuticals

Janssen Pharmaceuticals filed litigation against the U.S. Department of Health and Human Services and the Centers for Medicare and Medicaid Services in July 2023, challenging the constitutionality of the Inflation Reduction Act’s Medicare Drug Price Negotiation Program. The litigation seeks a declaration that the IRA violates Janssen’s rights under the First and Fifth Amendments to the Constitution, thereby preventing it from subjecting Janssen to the IRA’s mandatory pricing scheme.

Russia & Ukraine Conflict

The financial impact of Russia’s invasion of Ukraine in fiscal year 2023 was not significant, with Russian subsidiaries representing less than 1% of the company’s consolidated assets and 1% of revenues. Johnson and Johnson does not maintain Ukraine subsidiaries post-Kenvue separation. In early March 2022, the company suspended advertising, clinical trial enrollment, and investment in Russia, but continues to supply healthcare products for patients. The long-term implications of the conflict are uncertain.

Middle-East Conflict

The financial impact of Israel’s conflict in fiscal year 2023, including accounts receivable and inventory reserves, was not material. As of December 31, 2023, the business of Israel subsidiaries accounted for 1% of Johnson and Johnson’s consolidated assets and less than 1% of revenues. Long-term implications are uncertain.

Talent Management

Offering competitive compensation and benefits, including performance incentives, pension, health, welfare, paid time off, leave, flexible work schedules, and employee assistance programs is a primary focus for management. The company prioritizes employee health, well-being, and safety, ensuring safe work for all employees, including temporary contractors and visitors.

Cybersecurity

Johnson and Johnson has established cybersecurity policies and standards, assesses risks from cybersecurity threats, and monitors information systems for potential issues. It uses various security tools for protection, detection, and response capabilities. A cybersecurity incident response plan ensures a consistent response to incidents. The company also identifies and assesses third-party risks within the enterprise and through third-party service providers, including data security and supply chain.

A formal information security training program is maintained for all employees, covering phishing and email security best practices and data privacy. Regularly, third-party experts evaluate and enhance the company’s information security program. Currently, the company is not aware of any cybersecurity incidents which could materially impact its business or operations. However, due to changing attack techniques and increased sophistication, there is a potential for adverse impact, potentially resulting in reputational, competitive, operational, financial costs, and regulatory action.

Johnson and Johnson adopts a risk-based approach to cybersecurity, with controls implemented to address threats. The Chief Information Officer (CIO) and Chief Information Security Officer (CISO) manage cybersecurity risks, including prevention, mitigation, detection, and remediation of incidents. The CISO, with over 25 years of experience in information security, leads the company’s cybersecurity program and manages cybersecurity risk. The CIO, a member of the Executive Committee, has technical, strategy, architecture, cyber, and threat experience.

The Board of Directors manages risk management, including cybersecurity risks, through its committees. The Regulatory Compliance & Sustainability Committee (RCSC) is responsible for ensuring compliance with laws, regulations, and policies related to privacy and cybersecurity. RCSC meetings discuss specific risk areas annually, and the CISO provides annual updates on cybersecurity matters. These updates include an overview of the threat landscape, key initiatives, changes in legal and regulatory landscape, and incidents within the company and industry.

Understanding Risk Factors

Investment in Johnson and Johnson common stock or debt securities involves risks and uncertainties. Johnson and Johnson aims to manage and mitigate these risks, but many are outside its control and cannot be eliminated.

Key Risk Factors

1. Johnson and Johnson’s businesses operate in highly competitive product markets, which could potentially negatively impact its earnings due to competitive pressures.
   
2. Johnson and Johnson relies on timely delivery of high-quality components and materials for its products. With 61 manufacturing facilities and sourcing from thousands of suppliers worldwide, the Company may face unexpected manufacturing disruptions due to regulatory actions, labor disputes, natural disasters, raw material shortages, political unrest, and pandemics. These disruptions can lead to product shortages, sales declines, reputational impact, and significant remediation costs.
   
3. Johnson and Johnson’s business may be negatively impacted by delays and increased costs due to the potential failure or loss of a third-party manufacturer or supplier.
   
4. The pharmaceutical industry faces challenges due to the vulnerability of distribution channels to illegal counterfeiting and the increasing presence of counterfeit products in markets and online. Counterfeit medicines pose a risk to patient health and safety due to their manufacturing conditions, often in unregulated, unlicensed, and unsanitary sites. The industry’s failure to mitigate this threat could negatively impact its business and reputation, potentially leading to lost sales, product recalls, and increased litigation threats.
   
5. Global health crises, epidemics, pandemics, and other outbreaks pose risks to Johnson and Johnson. The COVID-19 pandemic negatively impacted the company’s business, operations, and financial condition, leading to lower sales and reduced customer demand. The company may modify its business practices and take further actions in the best interest of patients, customers, employees, and business partners. Although robust business continuity plans are in place to mitigate the impact of health crises, they may not completely prevent the company from being adversely affected. Health crises could affect manufacturing operations, supply chain, third-party suppliers, sales and marketing, and clinical trial operations. These factors could negatively impact the company’s business, financial results, and global economic conditions.
   
6. Johnson and Johnson’s Innovative Medicine and MedTech products are influenced by third-party payers, such as government healthcare programs, private insurance plans, and managed care organizations, which are putting downward pressure on product prices to contain healthcare costs. Increased purchasing power of entities negotiating on behalf of Medicare, Medicaid, and private sector beneficiaries could further pressure prices.
   
7. Product reliability, safety, and effectiveness issues can significantly affect sales, operational results, lead to litigation, and cause reputational damage.
   
8. Johnson and Johnson’s international nature may be impacted by geopolitical or economic events, including global tensions and war, which could negatively impact its business results or financial condition.
9. Johnson and Johnson has incurred significant expenses in the Kenvue separation and may not fully realize the expected strategic and financial benefits. The anticipated benefits were based on assumptions that may be incorrect. The company holds a 9.5% ownership interest in Kenvue, but cannot predict the trading price of shares and market value due to market volatility and other factors. The company intends to divest its ownership interest in Kenvue, but there is no assurance regarding the timing. Unanticipated developments could delay or adversely affect the divestiture, including financial market conditions.
10. Johnson and Johnson’s growth depends on recruiting and retaining talented employees from diverse backgrounds and skill sets. The highly competitive market for skilled workers and leaders is crucial for their success. Maintaining a diverse, equitable, and inclusive work environment attracts top talent. If Johnson and Johnson fails in recruiting or retaining skilled workers, their ability to develop and deliver successful products and services may be affected. Effective succession planning is also crucial for our long-term success. Inadequate implementation or failure to ensure smooth transitions could negatively impact the business, financial condition, or operational results.
    
11. Johnson and Johnson faces significant compliance costs due to the rapid increase in new government laws and regulations. Failure to implement changes may expose the Company to investigations, legal actions, or penalties. Regulatory issues with Good Manufacturing Practices can lead to fines, product recalls, shortages, production interruptions, delays, and litigation.

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